Low rates and the promise of a profit are feeding a housing frenzy. Are you really ready to buy?July 24, 2003: 9:56 AM EDT
By Sarah Max, CNN/Money Staff Writer

Bend, Ore. (CNN/Money) -
Feel the pressure? Homeownership in America is near an all-time high of 68 percent, according to the U.S. Census Bureau.

In fact, homeownership seems such a good deal these days, people who might otherwise have rented for a few more years are now eager to own. The National Association of Realtors (NAR) reports that four out of 10 buyers are first-time buyers.

"There seems to be a sense of urgency, especially among first-time buyers," said Anthony Hsieh, founder and CEO of HomeLoanCenter.com. "We're seeing people in their 20s and 30s who have the 'I need to buy a home now' attitude."

Chris Viale, general manager of Cambridge Credit Counseling Corp. said his organization's credit counselors have been getting more and more calls from people looking for quick credit fixes so they too can hop on the bandwagon.

"With all of the ads for low rates and easy home ownership, people are thinking now is a window to not miss," Viale said.

True, there are many virtues to home ownership. But before you decide to trade in your carefree lifestyle for a mortgage and weekly trips to Home Depot, you need to make sure you're buying the right house and for the right reasons.

There are three factors to consider: Your current resources; your plan for the next few years; and finally (too often overlooked) your overall debt burden.

Why the rush?

There was a time when you couldn't think about buying a house until you had a sizable down payment in the bank. Saving that kind of money took a while, giving would-be buyers a chance to research the market, improve their credit and think about where they wanted to live for the next several years.

Now that it's possible to put as little as 5 percent down, it takes far less planning. But that's not necessarily to your benefit. Without good credit and a decent down payment you won't get the lowest rates available, and you'll probably pay private mortgage insurance (PMI), easily adding $100 to your monthly payment.

"You have to do the research and see how much it is really going to cost you to own a home, then start saving so you have enough for a down payment, closing costs and everything else," Viale said.

Yes, it's true that interest rates can't stay this low forever. But that alone is not a reason to rush into home ownership. And forecasters don't expect drastic increases. "We're looking at a gradual increase to 5.7 percent by the end of the year," NAR spokesperson Walt Maloney said, referring to 30-year fixed loans.

Plan on sticking around?

Owning usually makes more sense than renting -- but that's assuming you're prepared to stay in your house for at least two to three years. "You need at least that much time to recoup all of the expenses of going in and going out," said Ray Brown, co-author of "Home Buying for Dummies."

Going into a house, you'll pay closing fees ranging from 0.5 to 1.5 percent of the price of your loan. That doesn't include the price of a home inspection, moving and other costs.

According to Viale, the average homeowner spends $10,000 to $12,000 on miscellaneous expenses, such as new furniture, window treatment and lawn care gadgets.

Then, if you turn around and sell, you face broker's fees of anywhere from 5 to 7 percent of the sale price unless you try to sell the house on your own. "Even if your house does go up $20,000 in one year, a lot of that will have to pay for your commission," Brown said. "If you have a $300,000 house and 5 percent commission, say bye-bye to $15,000."

Are you buying too much house?

All things being equal, housing is more affordable these days because of low interest rates. But Hsieh and others worry that some homebuyers are just taking on more house than they can handle.

"People who shouldn't pay more than $400,000 for a home are now looking at $600,000 and $700,000 homes," he said. "All they care about is what their monthly mortgage payment is."

Problem is, these same people are opting for adjustable rate mortgages, which offer the lowest rates but only for the first two to seven years of a 30-year loan. These loans make sense for borrowers who are certain they'll be moving on before their rate goes up.

But Hsieh says a lot of people are choosing adjustable rate mortgages for the primary reason of lowering their payment or increasing their loan amount. In which case, they are in for a rude awakening if rates go up.

Indeed, if a $500,000 loan is financed with a 5-year ARM of 4.25 percent, the principal and interest is about $2,450 a month. But when those 5 years run out and the rate floats to, say, 7 percent, the monthly payment will jump to more than $3,300, an increase of nearly $1,000 a month.

Finally, let's not forget the higher property taxes, insurance premiums, heating and maintenance costs that come with larger, more expensive houses. (See "Taxes: The bane of the housing boom.")

Even if interest rates have fallen in recent years, the prices of these homeowner necessities have, unfortunately, been going up.